Why Trickle-Down Economics Doesn’t Work

One of the most pervasive discussions taking place in American life is whether so-called “trickle-down economics” is an effective fiscal policy. Proponents of the system believe it is necessary to drive growth across all income groups. While opponents argue it creates rampant inequality & encourages capital hoarding.

If you couldn’t tell by the title of this article I am not a big believer in this economic structure & am looking forward to explaining why!

Who Said it First?

The first documented reference to a top-down economic system in the US was from William Jennings Bryan in a speech he gave as a presidential candidate in 1896. During which he discussed two types of government:

1. “[one that] legislates to make the well-to-do prosperous, their prosperity will leak through on those below”
2. “[one that] legislates to make the masses prosperous their prosperity will find its way up and through every class that rests upon it”

Bryan referred to the concept as a “leak” of capital from the top down, but the phrase “trickle-down” wasn’t officially coined until 1932 when a columnist named Will Rogers used the terminology to poke fun at the prospective policy.

Trickle-down’s popularity among economic discourse in the US didn’t start taking off until 1980 when Ronald Reagan won his first term as president. Coming to power after a period of economic stagflation under Gerald Ford, Reagan’s administration promoted their style of economic policy which was branded “Reaganomics.” Although being a hybrid theory Reaganomics was constructed & heavily influenced by trickle-down theory, thus driving the ideology into the mainstream political discussion.

Who said it first isn’t really important. What is important is that for decades it has been the source of major debate between those in favor of its policies & those against. Easily sewing itself into the fabric of American political/economic life.

Use it in a Sentence Please

Trickle-down economics isn’t complicated to understand. It purports that by driving more wealth into the hands of those deemed having the skills & resources to increase productive output, capital will ultimately funnel down across all classes.

A perfect implementation of a trickle-down policy would look something like this:

The government would roll back corporate income tax levels & loosen up regulations aimed at policing corporations. Wealthy individuals would also likely see a significant tax cut, which would result in more money staying in the hands of the highest earners in the country.

The belief is that by lowering the tax burden on corporations they would have more cash on hand to invest in operations; like opening new factories, upgrading technology, and hiring more workers, which would ultimately boost economic growth across all income levels.

As it relates to cutting taxes for the wealthiest Americans, trickle-down theorists believe by putting more disposable income in their hands they will spend more money on goods & services. Thus driving demand, spurring economic growth, and creating more jobs.

On paper that all sounds great doesn’t it? Who doesn’t want lower taxes and more economic growth? But, have you ever heard the saying “if it seems too good to be true, it probably is?” I am sure you have & its application makes no exception here.

Trickle-down economics is based on 4 giant myths, which are begging to be debunked:

Myth #1: Tax cuts for corporations & the rich create more & higher paying jobs for everyone else

Ronald Reagan was a driving force behind this belief system. He consistently lobbied for lower taxes on corporations and wealthy individuals all in the name of economic growth. With that goal in mind, we can see his cuts did not achieve their aim.

However, if the goal was to increase wealth inequality in the US it was a smashing success!

In 1979, one year before Reagan took office, the richest 1% in the US-owned 23% of the nation’s wealth. By 1989, after rounds of tax cuts, they owned 29%. By 2019, after continued tax cuts by George W. Bush & Donald Trump that number ballooned to 35%. Meanwhile, incomes & overall wealth barely moved for the middle class & inverted for those in the bottom 10%.

Looking at the most recent example of tax cuts targeted at corporations & the wealthy we can see a modern example of failed economic expansion. Tax reform was perhaps Trump’s only “real” piece of legislation throughout his presidency & the results were pretty abysmal for the average American.

Corporations did not use the cost savings to re-invest in their companies’ growth, thus expanding job creation & pay; instead, they used the windfall to engage in aggressive stock buyback operations & boost share prices. From 2017–2018 stock buybacks across the market increased 50%.

Lowes offers a poignant example of what happened post-Trump tax cuts. After announcing plans to buy back $10 billion worth of stock in late 2018, Lowes followed up just a few months later by laying off thousands of workers with no notice & no severance.

Walmart did something quite similar in 2018. After publicly announcing large bonuses to select corporate-level employees (aka executives) as a direct result of tax cut windfalls, they promptly laid off thousands of employees.

Moreover, after Trump’s tax cuts it was determined that there were “no unusual or sustained wage accelerations.” Put simply, they didn’t do what he said they would do.

COVID-19 has exacerbated this inequality even further. During the past year and change, we have seen 664 billionaires grow their wealth a collective $1.3 trillion. Officially allowing them to control more wealth than the bottom 50% of Americans combined.

To put this number in perspective, that means 664 individuals (population size of a small high school) own more wealth than 165,000,000 people combined.

Even more shocking, NONE of this money has trickled down to average Americans who have suffered immensely during the pandemic. They had to watch for months as the government pathetically “strategized” how to give them a paltry $1,200 check. And then deal with billionaires telling them they aren’t incentivized to work because they received 2-weeks of income from Uncle Sam.

Myth #2: Tax cuts spur economic growth

Pardon my French, but this is just straight-up bullshit. Even Reagan’s lauded economic boom years were not driven by tax reduction. Instead, they were spurred on by interest rate manipulation & massive government spending (public debt rose from 26.1% in 1980 to 41% by 1988).

To justify his 2001–2003 tax cut proposals, George W. Bush claimed that economic growth would be so great the tax cuts would pay for themselves. How fun! Except it didn’t work out that way. Not only did his tax cuts have no discernible economic stimulus, but his presidency saw an overall decrease in GDP growth.

When he inherited his power from Clinton GDP growth was around 3%. By the end of Bush’s first term GDP growth shrank to 2.8%. By the end of his second term, it was clocked at a paltry 0.5%.

These numbers are significant because not only do they show how trickle-down theory applied doesn’t expand economies, but it also represents the weakest economic performance of any president since World War II (excluding the pandemic economy of 2020). Way to go Georgie!

When Trump was president he claimed his round of tax cuts would be like “rocket fuel” for the economy (probably also said something like it being a “beautiful economy, possibly the greatest in all history of economies”).

Like his predecessors before him, in the years following Trump’s cuts we saw GDP growth decline. Yikes.

Myth #3 General deregulation encourages economic expansion

If your goal is to benefit corporate executives & their big-time investors then rolling back regulation is a fantastic idea! However, the average American will not see any benefit from these “productivity increases” or “cost savings.” It’s more likely they will see a real decline in income or standard of living as a result.

A large part of Ronald Reagan’s regulatory policy was removing restrictions imposed on for-profit healthcare companies, which allowed them to rake in the dough. All it cost regular folks was a massive spike in healthcare costs, which we are still saddled with today!

Let’s not forget another example. Financial deregulation, championed by great thinkers like Alan Greenspan, was the primary driver behind the economic meltdown of 2008. Ironically, all in the name of supporting long-term economic growth.

Trump’s administration serves as the most recent example of these types of regulatory reversals. Under his leadership, the EPA rolled back more than 100 environmental protection rules. Everything from the management of water pollution at coal plants to air pollution at oil refineries to regulation regarding the use & disposal of dangerous chemicals.

Resulting in huge windfalls for executives in the fossil fuel industry & their investors. All it costs us as a country is 1.8–2.1 billion metric tons of additional greenhouse gases released into the atmosphere. Who needs a habitable planet when you have big year-end bonuses? Oh yeah, per usual, ordinary Americans see no financial benefit from these rollbacks.

Myth #4 wealthy people create jobs

This is one of the most pervasive economic myths & is a fundamental piece of trickle-down theory. The idea is the wealthiest people in our country took the risks necessary to grow businesses & businesses employ millions of people, therefore wealthy people directly sponsor employment growth.

On face value this checks out. Entrepreneur’s do take risks & possess skills that average people do not & therefore definitely indirectly contribute to job expansion. But, who is buying these entrepreneurs products to keep their businesses open & expanding? The middle-class.

70% of consumer spending annually comes from the middle-class. Groceries, TV’s, cars, clothing, and everything else that isn’t exclusively marketed to high net worth individuals is supported directly by middle-class spending. It’s a simple calculus; there are substantially more people in the US who identify as middle-class, than those in the 1% (which is kinda why they’re called the 1%).

Amazon employ’s hundreds of thousands of workers, but what happens to Amazon’s business if everyone in the middle-class stops buying Amazon products?

The answer is quite simple: they will see a massive decline in revenues & income and in order to cut costs they will shutdown warehouses & lay off thousands of employees. Resulting in net job loss.

You think Bill Gates spends his time shopping for products on Amazon in enough quantity to keep that business afloat? Of course not. Entrepreneur’s do take risks & have skillsets that should be rewarded, but the idea they are directly contributing to job creation in this country is ludicrous. You only hire more people when your company is expanding & your company only expands if demand for your products continues to increase. That demand is provided for by the middle-class.

What Can We Do Instead?

The current iteration of the financial system was built by us & as such, it can be restructured by us. Despite massive campaigns promoted by those who continue to benefit from an unequal system, change is not only possible but, in my opinion, required.

Among the most prominent counter-theories to trickle-down is the so-called “middle-out” model. It’s not hard to decipher what this means: focus on strengthening the middle-class to spur economic growth.

As we learned from Myth #4 the middle-class are directly responsible for 70% of consumer spending annually. Which means they are the real job creators in the US. More jobs = more income. More income = more spending. See how that works?

What is surprising is the number of people who refuse to believe this fundamental truth: rich people save more of their income, thus pulling money out of circulation & not contributing towards economic growth. Elon Musk can’t buy enough TV’s to keep TCL in business right? It’s middle-class Americans who keep these businesses afloat & directly drive economic expansion & job growth.

With that in mind, how does it make sense as a fiscal policy to pull more money away from the very people who will spur the growth you’re looking for? (that’s rhetorical because the answer is greed).

If people in the middle-class are seeing continual reductions in their disposable income they will NOT spend more money buying shit. If I only have enough money to buy groceries & a t-shirt then TCL suffers when I don’t buy that new TV.

When inequality gets out of hand (like we are seeing now) one of the most logical ways for governments to address it is by raising taxes on corporations & the wealthy. Effectively allowing for a long-term recirculation of wealth from the haves to the have nots.

The government’s only source of real income is via taxes. By simply raising top tax rates, capital gains tax, and taxing inherited wealth the US could generate an additional $1.5 trillion in revenue over 10 years. Allowing the government to invest in programs & solutions aimed at tackling the massive disparity between the 1% and the rest of Americans.

“But Socialism!”

Before you go crying about how “taxes have never been this high in history!” try to remember a couple of things:

1. US economic history did not begin in 1980
2. During every major event before Reagan, we raised taxes on the wealthy

By the end of World War I the highest tax rate in the US jumped from 15% in 1916 to 77% by 1918. During the Great Depression, taxes on the highest earners rose from 25% to 63%. In 1944 (height of WWII) top tax rate peaked at 94% on income over $200,000 ($2.5m), because war is expensive.

In contrast, at the onset of the most expensive war in American history, President Bush lowered the income tax on the richest Americans from 39.6% to 35%.

You can cry foul all you want, but remember “trickle-down economics” is just a fancy label for corporate socialism. One that results in ballooning deficits, lower wages for average citizens, and economic decline over the long term.

If we can’t avoid evil “socialism” why wouldn’t we want to invest in the type that drives prosperity across all income levels and spurs economic growth?

Or of course, we could wait until inequality gets so out of control that people start attaching themselves to extreme ideologies (e.g. fascism, authoritarianism, etc.), which history provides so many examples of I could fill an entire book.

We have done better in our past & we can do better for our future.

Originally published at https://www.thedeminggroup.com on May 7, 2021.